Since pandemic restrictions eased, revenues of hospital companies are on an uptrend. While this is driven mainly by the hospital business, some companies like Apollo Hospitals Enterprise and Max Healthcare Institute are also focusing on integrated healthcare services, ranging from pharmacy distribution to diagnostics - areas that are seeing intense competition from new players. The jockeying for revenue and market share could pressure margins in these segments, as companies spend more on marketing and discounts. 

However, in the hospital business, things are looking up. A key metric tracked in the industry, average revenue per operating bed or ARPOB is expected to remain healthy and rise YoY in Q2FY23. This is mainly due to price hikes, changing the payer mix (towards higher margin self-paying and insurance categories), and clinical mix (towards high-margin specialized surgeries). In Q1, the ARPOB of all four companies in focus (Apollo Hospitals, Max Healthcare Institute, Narayana Hrudayalaya, and Aster DM Healthcare) rose YoY. 

Healthcare facilities companies that derive a majority of their revenue from hospital businesses like Narayana Hrudayalaya and Aster DM Healthcare have a clear path ahead to boost their revenue. These hospitals plan to focus on capacity expansion to increase bed counts going forward to drive revenue higher.

Quick takes

• Healthcare facilities industry outperforms the Nifty 50 in the past quarter
• Hospital segment continues to drive revenue, profit, and margins higher
• Huge capex plans are set in place for FY23 and hospitals are on a path of rapid expansion
• Average length of stay or ALOS is on a downtrend leading to increased profitability
• Pharmacy and diagnostic segments to remain under intense competition from companies from different industries

Top hospital companies outperform the Nifty 50 in the past quarter

The Nifty 50 rose sharply by 14.1% in the past quarter. Still, the healthcare facilities industry managed to outperform the benchmark index by over 6%. Barring Narayana Hrudayalaya, the other three companies in focus outperformed the Nifty 50 in the past quarter.

Aster DM leads the pack, rising close to 40% in the past quarter. Top hospital companies showed YoY revenue growth in Q1FY23 on the back of rising ARPOB. In addition, analysts and investors are positive about huge capex plans to increase the bed count to drive the topline higher. 

These healthcare facilities providers’ capex is expected to rise between 17% to 66% in FY23, according to Trendlyne’s Forecaster estimates. The primary objective of capex plans is to increase the bed count and drive the topline higher. And the expansion is on track for these hospital companies in FY23. In Q1FY23, Apollo Hospitals announced the acquisition of a hospital asset in Gurugram with a potential of 650 beds for Rs 459 crore from Nayati Healthcare and Research NCR Private.

Narayana Hrudayalaya acquired a 100-bed unit in Bangalore for Rs 80 crore on September 5. Aster DM, which derives over 75% of its revenues from Gulf Cooperation Council countries, plans to add 1,000 beds in India by FY23. This is an increase of 25% from its capacity in India.

With such large funds allocated for capex, investors need to keep in mind that aggressive expansion plans come with risks, and building new hospitals will put pressure on margins as new units take longer to turn profitable.

ARPOB continues its growth momentum while ALOS improves for top hospital companies in Q1

Rising average revenue per operating bed or ARPOB for hospitals is mainly driven by the clinical mix and payer mix. With the pandemic in the rear-view mirror, the clinical mix is leaning more towards specialized surgeries while the payer mix is shifting towards higher-margin self-paying and insurance categories.

Apollo Hospital’s and Max Healthcare’s ARPOB in particular rose over 25% YoY in Q1FY23. According to Apollo Hospital’s management, this trend is expected to continue in Q2 as well. Price hikes taken during Q1FY23 also helped drive the ARPOB higher.

Another factor that bodes well for hospitals amid rising ARPOB is the shortening of average length of stay or ALOS.

The Managing Director of Max Healthcare, Abhay Soi, explained in the Q1FY23 earnings call “For any hospital, you make money in the surgeries. Most profitable is the daycare”. He added that the longer a patient stays in a hospital, the profitability of a hospital reduces. Apollo Hospital’s management said that it is using robotics and minimally invasive procedures to discharge patients faster and thereby reduce ALOS.

Trendlyne’s consensus estimates show healthy revenue growth for hospital companies in FY23

With rising ARPOB amid healthy occupancy and falling ALOS, the revenues of top hospital companies are expected to rise in the range of 7.7% to 28.7%.

Though hospital companies are expected to post healthy revenue growth in FY23, one factor that investors will look at is what kind of expansion plans are driving revenues. 

Apollo Hospitals, for instance, raised its guided expenditure in the Apollo 24/7 segment by 20% in FY23 to sustain the growth momentum amid intense competition in the pharmacy distribution segment. Healthcare service providers like Max Healthcare and Apollo Hospitals have multiple levers of growth in their integrated healthcare services offerings. However, with several younger companies entering healthcare services segments while offering heavy discounts to acquire customers, these hospitals may face margin pressure in the short run.